Sales

My son was in line to pay at a Starbucks coffee shop one time, and observed the following exchange between the man just in front of him in line to pay and the barista:

Man: How much is that pastry?

Barista: Three dollars.

Man: I’ll give you two.

Barista: Sir, this is Starbucks; the price is the price.

Man: Let me speak to your manager.

Manager: What seems to be the problem?

Man: I’ll give you two dollars for that pastry. If you don’t sell it soon, you’re going to have to throw it out.

Manager: OK.

My son (stepping up to pay): I’d like a dollar off my bill, please.

Do you hate to negotiate? Many people hate to, or fear to. They meekly pay the asking price no matter how high nor who’s asking.

On the other hand, some people seem congenitally incapable of accepting the first offer, and will argue about price at the drop of a hat. I used to work with a guy named Don, and one time in Canada there were three of us at a steak restaurant and we were all considering ordering the prime rib. Don called the waiter over and negotiated a volume discount! I wanted to quietly slide under the table, but Don just blithely went on his way. The waiter put his foot down when Don tried the same tactic with dessert, though.

As this educational video demonstrates, people who don’t like to negotiate will always be at the mercy of those who do.

I used to be firmly in the camp of those meek souls who find haggling to be either frightening, distasteful, or immoral, but I’ve learned to come a long way. Not quite like Don, but I’ve learned that negotiation is perfectly acceptable, profitable and even fun.

My awakening came about in a funny way. I was teaching a sales training class with my boss one December. We were scheduled for two days of straight sales skills and one day of negotiations training. I had never seen the negotiation module and my role was to observe and learn. Unfortunately, my boss got called away unexpectedly and told me that I would have to deliver the module the next day. I spent most of the night going over the material and rehearsing my delivery, and was able to pull off a decent performance. I can’t say for sure how much the students learned about negotiating, but I know I learned a ton, which I proved to myself when I went to buy my wife a present at a mall jewelry store. I picked the one I wanted, and then offered them half the price on the tag if I paid cash. I ended up getting it for 30% off.

Since that time, I’ve negotiated with many parties in many different countries. I haven’t always been as successful as I would have wanted, but one thing I have found out for sure: it never hurts to ask.

As I wrote in my last blog post, an understanding of the psychology of pricing can help you earn the margins you deserve. Even the most analytical buyers are not rational calculating machines, so if you understand the psychological levers that affect their willingness to pay, you can raise your chances of getting the margins you deserve. We’ll start with the concept of signaling.

Psychologist Robert Cialdini in his book Influence, relates the story of a jeweler in Arizona who was stuck with a display case full of slow-moving turquoise jewelry. Before leaving town, she left a note for her assistant to mark down all the prices in the case by ½. The assistant misread the note and doubled all the prices. The entire lot sold out within days.[1]

That story illustrates an important point about pricing. In a world of perfect information and completely rational buyers, classical supply and demand curves would make perfect sense. As prices for a good go up, demand will go down. But in the real world, sometimes raising prices can make demand go up. That’s because buyers rarely have perfect information, nor do they decide on pure logic.

Let’s look first at information. Like a lover’s glance, a single number can speak volumes.

Imagine that you go to a store to buy a new set of pots and pans. You like to cook, and hope to get better at it, but you’re by no means a professional chef. As you examine the three different sets on offer, you peruse the small placards that list the features of each, but they don’t mean much to you. But of course you notice the prices, and chances are very high that you will not select the lowest-priced set; or if you do, you will think hard about what you’re giving up to save a few dollars. Without realizing it, you are interpreting the signals that the price tags are sending you.

Signaling works because it can simplify your decisions and short-cut your search for information. As Daniel Kahneman, one of the founding fathers of behavioral economics, reminds us, “If a satisfactory answer to a hard question is not found quickly, System 1 will find a related question that is easier and will answer it.”[2] So, rather than trying to tackle the question “what is it worth?”, we ask instead, “what does it cost?”

Also, we implicitly assume that something is priced based on how much it cost to produce, if one set of pans costs twice as much, it must have superior materials and craftsmanship, so it’s going to cook our food more evenly, look better in our kitchen, and last longer. We draw all those conclusions

Finally, price can send a signal about relative supply and demand. If the price of something goes, up, it must mean it’s in greater demand, which can make it seem more attractive to a potential buyer. When Chivas Regal was faced with flat whiskey sales in the 1970s, they increased sales significantly by changing the label and boosting the price by 20%.[3] (There’s even a prestige factor, in which some people will pay exorbitant prices for luxury goods precisely because they prices are exorbitant, but that’s outside the scope of this book.)

Since it’s so difficult to do all the research and weigh all the different factors that affect value, we also gut feel to help us decide, and one of the most important emotions associated with buying decisions is fear/confidence dynamic. That’s why confidence is one of the greatest assets a salesperson can have. Those who act more assertively and confidently tend to be accorded higher status, and in general are perceived to be more competent than they actually are.[4] If you come to the table unapologetically with a higher price, you send a strong signal about your belief in your solution, and that confidence can be contagious. That’s why I’ve advocated before that when your buyer objects that your competitor has a lower price, instead of getting defensive, ask them to consider why they place a lower value on their product.

Prices and confidence are strongly correlated—in plain English, we all believe that we get what we pay for. While that is not always true, it’s a powerful enough belief that it can even become a self-fulfilling prophecy. Dan Ariely, relates the results of an experiment he conducted at MIT in which participants were recruited to test a new painkiller, called Veladone-Rx, which they were told sold for $2.50 a dose. They were first subjected to a series of painful electric shocks. Then fifteen minutes after taking a tablet, they were shocked again. Almost all the participants reported that the perceived intensity of the shocks was reduced the second time. Another group went through the same procedure, but they were told that the Veladone sold for 10¢. About half experienced pain relief. The punchline is that the tablets that both groups took the same tablet—of Vitamin C!

That experiment demonstrates the power of the placebo effect in medical terms. Placebos work because we think they will, and it also shows the hold that prices can have on our expectations. The idea that you get what you pay for is strongly ingrained in our minds, that, “If we see a discounted item, we will instinctively assume that its quality is less than that of a full-price item—and then in fact we will make it so.”[5]

Similar effects have been found for cold medication and energy drinks. One experiment even found that the price tag associated with a glass of wine affected the perception of taste, and even showed up in increased activity in the pleasure centers of their brains.[6]

Ariely does go on to say that in further experiments he found that consumers who were asked to think about the relationship between price and quality were less likely to be affected, so it’s important not to read too much into this, because after all we’re assuming that B2B buyers will be more thoughtful or implement more safeguards against this type of thinking. Yet I’ve long had my suspicions that the credibility of many a consultant or speaker has been affected by the fee they charge.

Prices send signals that buyers receive loud and clear. Think about this before you decide to lower your price to win the business.

B2B selling is not getting any easier. Competitors are as aggressive as ever, customers are under pressure and are passing those pressures on to you, and your quotas are certainly not getting any lower. In this environment, the price battle is getting ever harder to win, and it’s extremely tempting to default to a lower price to win that big deal.

But if you’re armed with the right knowledge you can still win the price battle and preserve your margins. That’s because the key objective in this war is not your dumbest competitor’s pricing; it’s not some specified percentage over your costs; it’s the buyer’s willingness to pay (WTP). WTP is not a number—it’s a range, and you can strongly influence the extent of that range through your mastery of two topic areas: finance and psychology.

WTP is a function of (economic utility and psychological factors.

Economic Utility: In business to business sales, utility is the unquestioned number one factor that determines willingness to pay, because it is the fundamental reason that customers spend and invest, and it is often the factor over which you have the most objective and tangible control.

In economic terms, an asset is worth the present value of its differential cash flows. In plain English, that means that business buyers pay dollars in the expectation of getting more dollars in return, or preventing a greater loss.

The expectation of future cash flows is based on how the buyer uses what you sell to either increase cash inflows or reduce outflows. In sales terms, that means that your effectiveness depends on a) an intimate knowledge of how your customer can increase revenues, cut costs, or reduce asset investment, and b) being able to quantify and gain agreement in measurable financial terms.

Psychological factors: While economic utility sets the anchor from which the buyer perceives value, there is still a lot of room for perception (subjective factors), especially for products or services that the customer does not buy on a regular basis. If they’re buying supplies or raw materials, their expectation of the regular price is firmly set, but if they’re buying consulting services or a complex production system, they have very little experience with what things “should cost.”

What things “should” cost is a fascinating field in psychology. Here are just a few of the more important factors that affect the psychology of WTP:

Framing

As Amos Tversky said, we don’t choose between options, we choose between descriptions of options. For example, you probably would not consider it fair if a store told you that you had to pay a surcharge for using a credit card, but what if they offered you a discount for cash? The point of all this is that how the decision is framed has a significant—often decisive—effect on the final decision.

One of the most important frames in pricing psychology is loss aversion, where potential losses are weighed more heavily than potential gains. Highlighting the risks of buying a cheaper product through well-designed questions can shift the focus away from price during your sales conversations.

Anchoring

Psychologist Dan Ariely describes an experiment in which participants are first asked to write the last 2 digits of their social security number, and then to submit mock bids on items such as wine and chocolate. The half of the audience with higher two-digit numbers would submit bids that were between 60 percent and 120 percent more. The simple act of thinking of the first number sets an “anchor” that strongly influences the second, even though there is no logical connection between them.

Suppose you are proposing a solution to a problem, which will require a $500k investment. In your presentation, it’s helpful to show that you looked at several options, but be sure to list the most expensive option first. $500k will seem less if you first tell them you considered an option that would cost $700k.

Signaling

Psychologist Robert Cialdini in his book Influence, relates the story of a jeweler in Arizona who was stuck with a batch of slow-moving turquoise jewelry. Before she left town, she left a note for her assistant to mark down all the prices on it by ½. The assistant misunderstood and doubled all the prices. The entire lot sold out within days.

The old idea that you get what you pay for is so strongly ingrained in our minds, that our perceptions of value and even utility can become self-fulfilling prophecies. Studies show that the price of an aspirin can actually affect the level of reported pain relief , and even experts’ opinions of wine quality are swayed by the bottle price. Think about this before you decide to lower your price to win business. If you’re proud of having a higher price, that confidence can be contagious.

These three factors barely scratch the surface of the vast and fascinating topic of price psychology. Here are three excellent books for learning more:

As someone who believes in the worth of the sales profession and strives to promote professional sales practices, I’m outraged and saddened by the actions of Wells Fargo Bank. They have tolerated, encouraged and incentivized a culture of outright fraud, and I believe responsibility extends to the highest levels.

I also have a personal connection to the banking industry: I was a commercial banker for ten years before getting into training. I was in lending, and our unique challenge was that we first had to sell the product, and then immediately begin trying to get it back! Back then, there was always tension between sales and sound banking practices. When business slowed down, we were urged to go out and find more businesses to lend money to, and the strictness of our underwriting seemed to be inversely correlated to where we were relative to quota.

But we had checks and balances, and I never saw an instance where ethical lines were crossed just to make a sale. In fact, we found that if we did a better job at selling, we had full pipelines and we could afford to be more choosy. That’s how a good sales culture works.

CEO John Stumpf’s response reminds me of the line from Casablanca: “I am shocked- shocked– to find that gambling is going on in here!” They act like they did not know what was going on, but when at least 5,300 employees were involved over five years, don’t you think anyone would notice? When accounts are systematically opened and then immediately closed after the person received quota credit, when many of the email addresses of the “account holders” used the wellsfargo.com domain name, don’t you think anyone would notice? When the person who ran the program is punished by receiving $124.6 million as she leaves, don’t you think responsibility applies to the highest levels? (And it’s not as if they’re actually taking responsibility for their actions, as this analysis shows)

Bad sales cultures don’t just happen—not to this extent and for this length of time. When a sales culture goes this wrong, there has to be responsibility and repercussions all the way up to the CEO. As the old saying goes, the fish stinks from the head first.